Drawing Up a Personal Budget

personal-budgetingOne of the first rules of wealth creation is to always live within your means in order to create a monthly surplus – and to do that, you will need to draw up a monthly budget.

To many people budgeting may seem tedious or boring, taking the fun out of life and depriving them of all the luxuries they work so hard for.

However, it’s quite possible to budget correctly while maintaining the lifestyle you deserve – here is a quick guide to balancing your monthly income and expenses.

It’s not what you earn, it’s how you spend it

This famous expression is almost a cliché today, but it does contain a seed of truth – earning a huge income is no guarantee of retiring comfortably or building wealth in the long term. In fact, a smaller income, wisely managed, may result in more retirement capital than a large income that is mostly spent each month.

The first step in the budgeting process is to write down your total household income after tax. This is simply the combined total of your income plus the income of any other working members of the household. Once you have calculated this figure, you’ll know how much money flows into the household each month – this is the easy part.

Calculating your monthly household spending

To calculate your monthly spending, you’ll need to add up all your household expenses. If you pay your accounts and buy mostly online and using your credit card, this should be easy – simply add up your total expenses for the past month and you’ll arrive at the total household expenditure.

To give yourself an idea of your average monthly spending, take the time to calculate your monthly expenses over three or four months. Bear in mind that months like December tend to have much higher expenses, as do birthday months and months when you are away on holiday. Once you’ve calculated your monthly expenses over a few months, you’ll get an idea of roughly how much you spend on average. Once you know this, you can proceed to balance your monthly budget.

Does your household run at a loss?

Take a look at your monthly income and expenses – if you find yourself spending less than you earn each month, you’re on the right track. If not, there are ways of balancing your budget that won’t have a drastic effect on your lifestyle, especially if a large chunk of your expenses are on luxuries or non-essential items.

Remember that some months will present you with unexpected expenses, and you may not be able to show a surplus every single calendar month. If you are showing a healthy annual surplus, you will soon be on the path to wealth creation.

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